In a separate blog post, I shared 3 reasons why most attorneys are so quick to set up small businesses as Limited Liability Companies, as compared to an S Corporation.
I also warned that you face higher taxes and increased audit risk by doing so.
Now we’re going to follow up with the Top 5 Reasons most small business owners should be operating as an S Corporation.
- Your bottom line net income from your S corporation appears on one line of Schedule E on your individual income tax return. Therefore there’s no income or expense detail showing up that would trigger a red flag like there is on Schedule C used to report income for a single member LLC
- Typical red flags such as travel, entertainment, and automobile expense receive less attention on an S corporation tax return, because the audit rate for S corps is substantially lower than that for schedule C businesses.
- Because the Federal budget allows the IRS fewer auditors than they need, most of their focus is directed towards big corporations and their larger amounts of potential tax dollars than on small business S corporations.
- If you are a subcontractor for another business, use of the S Corp. will help you avoid being issued a 1099-Misc, which is sent to both you and the internal revenue service, giving them an opportunity to match up your income.
- Last, but most important, you can save thousands of dollars by operating as an S Corp., because you substantially reduce the amount of Social Security taxes. This is because, unlike an LLC whose owner pay Social Security on all of the net income, an S Corp. is allowed to pay it’s shareholders a reasonable salary, with the remainder of the business’s net income taken by the S Corp. owner free of Social Security taxes.
Anchor On This: if you currently operate as an LLC or a sole proprietor, you can reduce your risk of a painful IRS audit and save a significant amount of taxes by switching to an S corporation.
If you’re ready to have that money leak sealed, and that audit risk disappear, so you can begin paying less in taxes and sleeping more soundly at night knowing your business is off the “IRS radar”, you can join the ranks of business owners who choose to convert to S Corp. status today.
Click the link for a free, no strings attached evaluation of whether the S Corp strategy is right for you. There’s no obligation or commitment.